What Is a Holding Period?

What Is a Holding Period?

Let me tell you directly: a holding period is the length of time you hold an investment, specifically the span between buying and selling a security. If you're in a long position, it's from purchase to sale. For short options, it's from when the short seller buys back the securities to when they're delivered to close the position.

Key Takeaways

You need to know that the holding period starts the day after you acquire the security and runs until the day you sell or dispose of it—this directly affects your tax obligations. The holding period return is the total return you get from holding an asset or portfolio over that time, usually as a percentage. Differences in holding periods lead to different tax treatments on your investments.

Understanding the Holding Period

The holding period matters because it decides how your capital gains or losses are taxed. A long-term holding is one year or more, with no upper limit. Anything less than a year is short-term. Even dividends paid into your account have their own holding periods.

Beyond taxes, the holding period return measures the total return from your asset or portfolio over the specified time, calculated from income plus changes in value, and it's great for comparing investments held for varying lengths.

How to Calculate a Holding Period

Start counting your holding period from the day after you buy the security, right up to the day you sell it—this setup determines your tax implications. Take Sarah, for example: she buys 100 shares on January 2, 2016, so her count begins on January 3. Each month's third day marks the start of a new month, no matter the days in it.

If she sells on December 23, 2016, that's a short-term gain or loss since it's under a year. But if she waits until January 3, 2017, it becomes long-term.

For the holding period return, use this formula: Holding Period Return = [Income + (End of Period Value - Initial Value)] / Initial Value. It's straightforward and helps you see the percentage return clearly.

Rules for Holding Periods

When you receive a gift of appreciated stock, your cost basis comes from the donor's, and your holding period tacks on the donor's time—this is called 'tacking on.' If the stock decreased in value and basis is fair market value, your period starts the day after you get the gift.

The IRS sees one year as the threshold for long-term gains, taxed more favorably at 0%, 15%, or 20%, versus short-term at up to 37%. For taxable stock dividends, the period starts on distribution date; for nontaxable, it matches the old stock's period.

To qualify dividends, hold common stock over 60 days in a 120-day window starting 60 days before ex-dividend, or preferred stock at least 90 days in a 180-day period starting 90 days before. This applies to spin-offs too: if you buy in April 2023 and get a two-for-one split in June 2024, your 200 shares keep the original April 2023 start date.

How Long Do You Need to Hold a Stock for Capital Gains?

Under IRS rules, hold longer than one year for long-term capital gains taxed at 0%, 15%, or 20%. Less than a year means ordinary income rates up to 37%.

How Long Do You Need to Hold a Mutual Fund?

Mutual funds often have a 30-day rule to stop frequent trading that hikes expenses. They might charge fees for early redemptions or block trades for a set period.

What Is the Holding Time for Insider Trades?

SEC Rule 144 covers non-public shares like those for insiders: hold public company shares six months before selling, or one year for private companies.

The Bottom Line

In finance, the holding period is simply how long you keep a security before selling it. Depending on the asset, follow the specific holding times to optimize under regulations.